-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jiyg33XP3vgZ0uCwoEQo/gfYqVYnMWHuw2M0KWoh5tQGUXyaHe/JERfNrYyPP+vq DdZHtRzabYJNcxSUD1c9XA== 0000702902-96-000008.txt : 19960814 0000702902-96-000008.hdr.sgml : 19960814 ACCESSION NUMBER: 0000702902-96-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARLEYSVILLE NATIONAL CORP CENTRAL INDEX KEY: 0000702902 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232210237 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15237 FILM NUMBER: 96610491 BUSINESS ADDRESS: STREET 1: 483 MAIN ST CITY: HARLEYSVILLE STATE: PA ZIP: 19438 BUSINESS PHONE: 2152568851 MAIL ADDRESS: STREET 1: 483 MAIN STREET CITY: HARLEYSVILLE STATE: PA ZIP: 19438 10-Q 1 FORM 10-Q FOR 06/30/96 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from__________________to____________________. Commission file number 0-15237 HARLEYSVILLE NATIONAL CORPORATION (Exact name of registrant as specified in its charter) Pennsylvania 23-2210237 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 483 Main Street, Harleysville, Pennsylvania 19438 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 256-8851 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X. No. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 6,637,824 shares of Common Stock, $1.00 par value, outstanding on July 31, 1996. PAGE 1 HARLEYSVILLE NATIONAL CORPORATION INDEX TO FORM 10-Q REPORT PAGE Part I. Financial Information Consolidated Balance Sheets - June 30, 1996 and December 31, 1995 3 Consolidated Statements of Income - Six Months and Three Months Ended 4 June 30, 1996 and 1995 Consolidated Statements of Cash Flows - Six Months Ended 5 June 30, 1996 and 1995 Notes to Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and 7 Results of Operations Part II. Other Information 15 Signatures 17 PAGE 2 PART 1. FINANCIAL INFORMATION HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, 1996 December 31, 1995 ------------------ ------------------- ASSETS Cash and due from banks $38,643,057 $34,312,059 Federal Funds sold 8,000,000 16,295,000 ------------------ ------------------- Total cash and cash equivalents 46,643,057 50,607,059 ------------------ ------------------- Interest-bearing deposits in banks 4,539,631 1,703,268 Investment securities available for sale 199,227,714 159,325,961 Investment securities held to maturity (market value $60,406,756 and $85,651,810, respectively) 60,089,255 83,668,528 Loans 663,497,905 638,219,573 Less: Unearned income (8,661,385) (9,481,622) Allowance for loan losses (10,494,247) (9,891,324) ------------------ ------------------- Net loans 644,342,273 618,846,627 ------------------ ------------------- Bank premises and equipment, net 12,503,018 11,995,396 Accrued income receivable 6,470,711 6,150,130 Other real estate owned 1,866,667 1,220,131 Intangible assets, net 1,809,080 1,959,860 Other assets 2,383,835 1,867,912 ------------------ ------------------- Total assets $979,875,241 $937,344,872 ================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $129,393,940 $117,698,263 Interest-bearing: NOW accounts 90,729,178 91,616,367 Money market accounts 166,989,778 155,641,250 Savings 106,863,539 101,993,095 Time, under $100,000 300,500,689 299,359,040 Time, $100,000 or greater 38,962,520 28,191,693 ------------------ ------------------- Total deposits 833,439,644 794,499,708 Accrued interest payable 13,099,411 12,081,557 U.S. Treasury notes 2,035,904 1,837,396 Federal Home Loan Bank (FHLB) borrowings 18,500,000 21,200,000 Securities sold under agreements to repurchase. 17,285,840 16,713,629 Other liabilities 5,349,911 4,650,512 ------------------ ------------------- Total liabilities 889,710,710 850,982,802 ------------------ ------------------- Shareholders' Equity: Series preferred stock, par value $1 per share; authorized 3,000,000 shares, none issued - - Common stock, par value $1 per share; authorized 30,000,000 shares; issued and outstanding 6,636,625 shares in 1996 and 6,316,208 shares in 1995 6,636,625 6,316,208 Additional-paid-in-capital 40,105,114 30,882,765 Retained Earnings 43,667,139 47,780,078 Net unrealized gains on investment securities available for sale (244,347) 1,383,019 ------------------ ------------------- Total shareholders' equity 90,164,531 86,362,070 ------------------ ------------------- Total liabilities and shareholders' equity $979,875,241 $937,344,872 ================== ===================
See accompanying notes to consolidated financial statements. PAGE 3 HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Six months Ended Three months Ended June 30, June 30, ------------------ -------------------- 1996 1995 1996 ------------------ ------------------- -------------------- INTEREST INCOME Loans, including fees $ 26,059,059 $ 25,212,363 $ 12,955,510 Lease financing 1,708,658 1,524,280 865,274 Investment securities: Taxable . 5,897,404 5,260,389 3,004,196 Exempt from federal taxes 1,825,578 1,237,252 975,365 Federal funds sold 398,774 202,228 142,443 Deposits in banks 71,833 54,163 51,557 ------------------ ------------------- -------------------- Total interest income 35,961,306 33,490,675 17,994,345 ------------------ ------------------- -------------------- INTEREST EXPENSE Savings deposits 4,733,310 4,921,089 2,394,789 Time, under $100,000 8,526,681 6,975,260 4,221,864 Time, $100,000 or greater 874,558 707,257 461,435 Borrowed funds 993,189 1,087,259 474,185 ------------------ ------------------- -------------------- Total interest expense 15,127,738 13,690,865 7,552,273 ------------------ ------------------- -------------------- Net interest income 20,833,568 19,799,810 10,442,072 Provision for loan losses 1,055,208 1,053,500 529,217 ------------------ ------------------- -------------------- Net interest income after provision for loan losses 19,778,360 18,746,310 9,912,855 ------------------ ------------------- -------------------- OTHER OPERATING INCOME Service charges 1,264,885 1,129,514 657,014 Security losses, net (119,050) (172,316) (69,181) Trust income 685,440 529,997 290,059 Other Income 584,531 524,642 309,089 ------------------ ------------------- -------------------- Total other operating income 2,415,806 2,011,837 1,186,981 ------------------ ------------------- -------------------- Net interest income after provision for loan losses and other operating income 22,194,166 20,758,147 11,099,836 ------------------ ------------------- -------------------- OTHER OPERATING EXPENSES Salaries, wages and employee benefits 6,753,463 6,178,974 3,336,947 Occupancy 905,776 757,051 429,847 Furniture and equipment 994,349 864,156 493,926 FDIC premium 87,350 834,876 42,975 Other expenses 3,656,946 3,318,966 1,771,947 ------------------ ------------------- -------------------- Total other operating expenses 12,397,884 11,954,023 6,075,642 ------------------ ------------------- -------------------- Income before income taxes 9,796,282 8,804,124 5,024,194 Income tax expense 2,767,697 2,603,158 1,379,722 ------------------ ------------------- -------------------- Net income $ 7,028,585 $ 6,200,966 $ 3,644,472 ================== =================== ==================== Weighted average number of common shares 6,663,650 6,637,124 6,664,252 ================== =================== ==================== Net income per share information $ 1.05 $ 0.93 $ 0.55 ================== =================== ==================== Cash dividends per share $ 0.38 $ 0.34 $ 0.19 ================== =================== ====================
See accompanying notes to consolidated financial statements.
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three months Ended June 30, 1995 ------------ INTEREST INCOME Loans, including fees $12,875,338 Lease financing 765,135 Investment securities: Taxable . 2,728,493 Exempt from federal taxes 610,836 Federal funds sold 171,010 Deposits in banks 29,351 ------------ Total interest income 17,180,163 ------------ INTEREST EXPENSE Savings deposits 2,409,460 Time, under $100,000 3,780,847 Time, $100,000 or greater 406,303 Borrowed funds 548,340 ------------ Total interest expense 7,144,950 ------------ Net interest income 10,035,213 Provision for loan losses 518,000 ------------ Net interest income after provision for loan losses 9,517,213 ------------ OTHER OPERATING INCOME Service charges 579,667 Security losses, net (28,667) Trust income 288,399 Other Income 260,020 ------------ Total other operating income 1,099,419 ------------ Net interest income after provision for loan losses and other operating income 10,616,632 ------------ OTHER OPERATING EXPENSES Salaries, wages and employee benefits 3,067,361 Occupancy 364,515 Furniture and equipment 453,459 FDIC premium 417,589 Other expenses 1,752,992 ------------ Total other operating expenses 6,055,916 ------------ Income before income taxes 4,560,716 Income tax expense 1,355,170 ------------ Net income $ 3,205,546 ============ Weighted average number of common shares 6,661,017 ============ Net income per share information $ 0.48 ============ Cash dividends per share $ 0.17 ============ See accompanying notes to consolidated financial statements.
PAGE 4 HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, OPERATING ACTIVITIES: 1996 1995 ------------- ------------- Net Income $ 7,028,585 $ 6,200,966 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,055,208 1,053,500 Depreciation and amortization 645,920 496,082 Net amortization of investment securities' discount/premiums 242,758 215,651 Net realized security loss 119,050 172,316 Increase in accrued income receivable (320,581) (204,557) Increase in accrued interest payable 1,017,854 996,502 Net increase in other assets (449,836) (332,052) Net increase in other liabilities 2,471,922 1,551,231 Decrease in unearned income (820,237) (84,779) Write-down of other real estate owned 111,067 99,894 Decrease in intangible assets 150,780 177,570 ------------- ----------- Net cash provided by operating activities 11,252,490 10,342,324 ------------- ----------- INVESTING ACTIVITIES: Proceeds from sales of investment securities available for sale 38,519,510 10,886,479 Proceeds from maturity or calls of investment securities held to maturity 7,552,678 14,403,016 Proceeds from maturity or calls of investment securities available for sale 20,506,109 10,903,472 Purchases of investment securities held to maturity - (31,162,273) Purchases of investment securities available for sale (85,735,641) (3,606,391) Net increase in short-term investments (2,836,363) (721,998) Net increase in loans (26,641,325) (9,177,111) Net increase in premises and equipment (1,153,542) (1,881,417) Proceeds from sales of other real estate 87,018 823,896 -------------- ----------- Net cash used in investing activities (49,701,556) (9,532,327) -------------- ----------- FINANCING ACTIVITIES: Net increase in deposits 38,939,936 29,884,211 Increase (decrease) in U.S. Treasury demand notes 198,508 (234,610) Decrease in Federal Funds purchased - (12,716,000) (Decrease) increase in FHLB borrowings (2,700,000) 12,200,000 Increase in securities sold under agreement 572,211 2,046,348 Cash dividends (2,528,016) (2,284,452) Dividend reinvestment (18,985) (76) Stock options 21,410 403,082 -------------- ----------- Net cash provided by financing activities 34,485,064 29,298,503 -------------- ----------- Increase (decrease) in cash and cash equivalents (3,964,002) 30,108,500 Cash and cash equivalents at beginning of year 50,607,059 36,820,176 -------------- ----------- Cash and cash equivalents at end of the second quarter $ 46,643,057 $ 66,928,676 ============== ============ Cash paid during the year for: Interest $ 14,109,884 $ 12,694,363 ============== ============= Income taxes $ 1,210,000 $ 1,617,006 ============== ============= Supplemental disclosure of noncash investing and financing activities: Transfer of assets from loans to other real estate owned $ 910,708 $ 274,526 ============== ============= See accompanying notes to consolidated financial statements.
PAGE 5 HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position of Harleysville National Corporation (the "Corporation") and its wholly owned subsidiaries - Harleysville National Bank and Trust Company ("Harleysville"), The Citizens National Bank of Lansford ("Citizens") and Security National Bank ("Security") (collectively, the "Banks") - as of June 30, 1996, and the results of its operations and cash flows for the six month periods ended June 30, 1996 and 1995. Prior year amounts have been restated to incorporate the acquisition of Farmers & Merchants Bank (see note five). It is suggested that these unaudited consolidated financial statements be read in conjunction with the audited consolidated financial statements of the Corporation and the notes thereto set forth in the Corporation's 1995 annual report. The results of operations for the six and three month periods ended June 30, 1996 and 1995 are not necessarily indicative of the results to be expected for the full year. NOTE 2 - Income tax expense is less than the amount calculated using the statutory tax rate primarily the result of tax exempt income earned from state and municipal securities and loans. NOTE 3 - The Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," on January 1, 1995. This new standard requires that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. The adoption of SFAS No. 114, as amended by SFAS No. 118 on January 1, 1995, did not have a material impact on the Corporation's liquidity, results of operations and capital resources. NOTE 4 - In October, 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." This statement requires a fair value approach to valuing compensation expense associated with stock options and employee stock purchase plans. This statement encourages, but does not require, the use of this method for financial statement purposes. Companies that do not elect to adopt this statement for financial statement purposes are required to present pro-forma footnote disclosures of net income and earnings per share as if the fair value approach were used. Statement 123 is effective for the Corporation in 1996 and will be applicable to all options granted after January 1, 1995. Management intends to adopt the disclosure requirements of this statement only and, accordingly, there will be no impact on the consolidated financial statements other than additional disclosures. NOTE 5 - On March 1, 1996, the Corporation consummated the acquisition of Farmers & Merchants Bank (Honesdale, PA.) ("Farmers"). The acquisition was pursuant to an Agreement and Plan of Reorganization and an Agreement and Plan of Merger which was executed on September 7, 1995. The agreements delineate the terms of the combination. The shareholders of Farmers approved the merger at a meeting of shareholders on January 31, 1996. For each share of Farmers common stock outstanding, 0.6190 shares of the Corporation's common stock were issued at the closing on March 1, 1996. As a result of the transaction, 438,262 new shares of Harleysville National Corporation, par value $1.00 per share, were issued on March 1, 1996 pursuant to Registration Statement No. 33-65021 filed with the SEC and which was effective January 2, 1996. Farmers' banking operations were merged into those of Citizens. The Farmers merger was accounted for on a pooling-of-interests basis. NOTE 6 - On May 9, 1996, the Board of Directors of Harleysville National Corporation declared a 5% stock dividend (five shares of common stock for each 100 shares of common stock outstanding held) that was payable June 28, 1996, to shareholders of record June 14, 1996. PAGE 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Consolidated net income for the first six months of 1996 was $7,029,000, an increase of $828,000, or 13.4%, over the first six months of 1995 net income of $6,201,000. Earnings per share for the first six months of 1996 were $1.05, compared to $.93 in the first six months of 1995. Consolidated net income for the second quarter of 1996 was $3,644,000, an increase of $438,000, or 13.7%, over the second quarter of 1995 net income of $3,206,000. Earnings per share for the second quarter of 1996 of $0.55 increased $0.07, or 14.6% , over the second quarter of 1995 earnings per share of $0.48. For the six months ended June 30, 1996, the annualized return on average assets and the annualized return on average shareholders' equity were 1.48% and 15.86%, respectively. For the same period in 1995, the annualized return on average assets was 1.41% and the annualized return on average shareholders' equity was 15.72%. For the three months ended June 30, 1996, the annualized return on average assets was 1.51% compared to 1.44% for the same period of 1995, and the annualized return on average shareholders' equity was 16.23% for the second quarter of 1996 and 15.83% for the second period of 1995. Net income is affected by five major elements: net interest income, or the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowed funds; the provision for loan losses, or the amount added to the allowance for loan losses to provide reserves for future losses on loans; other operating income, which is made up primarily of certain fees, trust income and gains and losses from sales of securities; other operating expenses, which consist primarily of salaries and other operating expenses and income taxes. Each of these major elements will be reviewed in more detail in the following discussion. NET INTEREST INCOME AND RELATED ASSETS AND LIABILITIES Net interest income for the first six months of 1996 of $20,834,000 increased $1,034,000, or 5.2%, over the first six months of 1995 net interest income of $19,800,000. Net interest income for the second quarter of 1996 increased by $407,000, or 4.1%, over the second quarter of 1995. As illustrated in the table on the next page, the primary source of this increase was a rise in interest income resulting from increases to earning asset volumes in the first six months of 1996, compared to the same period in 1995. The increase in interest income was partially offset by a rise in interest expense, primarily led by an increase in time deposit interest expense related to higher volumes and rates. The rate-volume variance analysis set forth in the table on the next page, which is computed on a tax-equivalent basis (tax rate of 35%), analyzes changes in net interest income for the six months ended June 30, 1996 over June 30, 1995 and the three months ended June 30, 1996 over June 30 1995 by their rate and volume components. PAGE 7
Six Months ended June 30, 1996 Over/(Under) June 30, 1995 Total Caused by: ---------- Variance Rate Volume --------- ----------- ------ Interest Income: Securities * 1,542 360 1,182 Money market instruments 214 (15) 229 Loans * 1,035 (343) 1,378 --------- ----------- ------ Total 2,791 2 2,789 --------- ----------- ------ Interest Expense: Savings deposits (188) (284) 96 Time deposits and certificates of deposit 1,719 557 1,162 Other borrowings (95) (173) 78 --------- ----------- ------ Total 1,436 100 1,336 --------- ----------- ------ Net interest income 1,355 (98) 1,453 ========= =========== ====== *Tax Equivalent Basis Three Months Ended June 30, 1996 Over/(Under) June 30, 1995 Total Caused by: ----------- Variance Rate Volume -------- ----------- ------ Interest Income: Securities * 832 187 645 Money market instruments (6) (12) 6 Loans * 184 (574) 758 --------- ----------- ------ Total 1,010 (399) 1,409 --------- ----------- ------ Interest Expense: Savings deposits (15) (148) 134 Time deposits and certificates of deposit 496 80 416 Other borrowings (74) (91) 18 --------- ----------- ------ Total 407 (159) 568 --------- ----------- ------ Net interest income 603 (240) 841 ========= =========== ====== *Tax Equivalent Basis
Taxable-equivalent net interest income was $21,965,000 for the first six months of 1996, compared to $20,610,000 for the same period in 1995, a 6.6% or $1,355,000 increase. This increase in taxable-equivalent net interest income was due to a $1,453,000 increase related to volume, offset by a $98,000 decrease related to interest rates. Total taxable-equivalent interest income grew $2,791,000, the result of the higher volumes in each earning asset category. Average year-to-date earning assets increased to $905,386,000 at June 30, 1996 from $831,137,000 at June 30, 1995, a 8.9% increase. Total interest expense grew $1,436,000 during the first half of 1996, compared to the same period in 1995. This growth was principally the result of both higher time deposit rates and volumes. The volume of average time deposits increased $41,351,000, or 14.1% during the first half of 1996, compared to the first half of 1995. Also contributing to the growth in interest expense were increases in savings deposits and other borrowing of $7,284,000 and $3,034,000, respectively. Other borrowings include Federal Funds purchased, Federal Home Loan Bank borrowings, securities sold under agreements to repurchase and U. S. Treasury notes. Taxable-equivalent net interest income of $11,043,000 was $603,000, or 5.8% higher for the second quarter of 1996, compared to $10,440,000 for the same period in 1995. Interest income grew $1,010,000 during this period, as a result of an increase in earning asset volumes. Second quarter average earning assets grew $72,456,000, compared to the second quarter of 1995. This growth included a $36,929,000 rise in investments and a $35,075,000 increase in loans. The increase in the interest income was partially offset by a $407,000 rise in interest expense. Increases in all deposit category balances and an increase in time deposit rates, contributed to this increase in interest expense. Nonaccruing loans are included in the average balance yield calculations, but the average nonaccruing loans were insignificant and had no material effect on the results. Variances attributable to both rate and volume are included in the volume column. NET INTEREST MARGIN The net interest margin was 4.85% for the six month period ended June 30, 1996, a decrease of .11% from the 4.96% net interest margin for the first PAGE 8 half of 1995. The yield earned on earning assets of 8.19% during the first half of 1996 was lower than the 8.25% earned during the first half of 1995. This drop in yield is due to the lower interest rate environment in 1996, compared to 1995. The 4.14% average interest rate paid on deposits during the first half of 1996 increased from the 4.03% rate paid during the same period in 1995. The increase in the rate is due to the higher rates paid on time deposits. The net interest margin was 4.83% in the second quarter of 1996, a .13% decrease from the 4.96% net interest margin recorded in the second quarter of 1995. The Banks have been able to effectively match assets and liabilities and maintain a consistent percentage of earning assets to total assets. PROVISION FOR LOAN LOSSES The provision is based on management's analysis of the adequacy of the allowance for loan losses. In its evaluation, management considers past loan experience, overall characteristics of the loan portfolio, current economic conditions and other relevant factors. Based on the latest monthly evaluation of potential loan losses, management currently believes that the allowance is adequate to absorb known and inherent losses in the loan portfolio. Ultimately, however, the adequacy of the allowance is largely dependent upon the economy, a factor beyond the Corporation's control. With this in mind, additions to the allowance for loan losses may be required in future periods, especially if economic trends worsen or certain borrowers' ability to repay declines. For the first six months of 1996 the provision for loan losses was $1,055,000, compared to $1,054,000 for the same period in 1995. The loan loss reserve grew 14.7% from June 30, 1995 to June 30, 1996. Net charge offs were $452,000 for the six months ended June 30, 1996, compared with $51,000 for the six months ended June 30, 1995. The net loans charged off during the first six months of 1996 were attributed to all loan categories. The ratio of the allowance for loan losses to loans increased to 1.60% at June 30, 1996, from 1.58% at December 31, 1995. ALLOWANCE FOR LOAN LOSSES Transaction in the allowance for loan losses are as follows:
1996 1995 --------------- --------------- Balance, Beginning of Year $9,891,000 $8,150,000 Provision charged to operating expenses 1,055,000 1,054,000 Loans charged off (513,000) (242,000) Recoveries 61,000 191,000 --------------- --------------- Balance, June 30 $10,494,000 $9,153,000 =============== ===============
Ratios: - ------- June 30, 1996 Dec. 31, 1995 June 30, 1995 ------------- ------------- ------------- Allowance for loan losses to nonperforming assets 83.9% 86.3% 178.4% Nonperforming assets to total loans & net assets acquired in foreclosure 1.93% 1.79% 0.85% Allowance for loan losses to total loans 1.60% 1.58% 1.52%
PAGE 9 The following table sets forth an allocation of the allowance for loan losses by loan category:
June 30, 1996 -------------- Percent Amount of Loans -------------- --------- Commercial and industrial $ 2,812,000 26% Installment and other 850,000 31% Real estate 1,973,000 36% Lease financing 96,000 7% Unallocated 4,763,000 N/A -------------- --------- Total $ 10,494,000 100% ============== =========
Nonperforming assets (nonaccruing loans, net assets in foreclosure and troubled debt restructured loans) were 1.93% of total loans and net assets acquired in foreclosure at June 30, 1996, compared to 1.79% at December 31, 1995 and .85% at June 30, 1995. The ratio of the allowance for loan losses to non-performing assets was 83.9% at June 30, 1996 compared to 86.3% at December 31, 1995 and 178.4% at June 30, 1995. Nonaccruing loans at June 30, 1996 of $9,612,000, increased $557,000 from the December 31, 1995 level of $9,055,000. Approximately $7,132,000, or 74.2%, of total nonaccruing loans are attributable to two unrelated commercial borrowers at June 30, 1996. The approximate amount of these two loans at December 31, 1995 was $6,972,000, or 77.0%, of total nonaccruing loans. One borrower has one loan in the amount of $5,242,000. This loan is well secured principally by real estate. This loan relates to a real estate development project. The other borrower has two loans in the aggregate principal amount of $1,890,000. These two loans are well secured principally by real estate. These two loans relate to a restaurant. Management continues to monitor these loans, and efforts to work out each of these loans are proceeding as quickly as administrative and legal constraints permit. The level of nonaccruing loans was $2,667,000 at June 30, 1995. Net assets in foreclosure totaled $1,933,000 as of June 30, 1996, an increase of $713,000, or 58.4%, from the December 31, 1995 balance of $1,220,000. During the first six months of 1996, transfers from loans to assets in foreclosure were $911,000, payments on foreclosed properties totaled $87,000 and write downs of assets in foreclosure equaled $111,000. The $911,000 in loans transferred to assets in foreclosure included $387,000 of mortgage loans, $85,000 of commercial loans and $439,000 of loans associated with consumer loans. The balance of net assets in foreclosure at June 30, 1995 was $610,000. Efforts to liquidate assets acquired in foreclosure are proceeding as quickly as potential buyers can be located and legal constraints permit. Generally accepted accounting principles require foreclosed assets to be carried at the lower of cost (lesser of carrying value of asset or fair value at date of acquisition) or estimated fair value. As of June 30, 1996, there were three unrelated borrowers with troubled debt restructured loans totaling $1,115,000, compared with a balance of $1,183,000 as of December 31, 1995 and $1,854,000 at June 30, 1995. All three customers were complying with the restructured terms as of June 30, 1996. Loans past due 90 days or more and still accruing interest are loans that are generally well-secured and expected to be restored to a current status in the near future. As of June 30, 1996, loans past due 90 days or more and still accruing interest were $1,988,000, compared to $1,553,000 as of December 31, 1995 and $1,410,000 as of June 30, 1995. PAGE 10 The following information concerns impaired loans as described in note 3: Impaired Loans:
Restructured Loans $1,115,000 Nonaccrual Loans 8,640,000 ---------- $9,755,000 ========== Average year-to-date impaired loans: $9,617,000 ========== Impaired loans with specific loss allowances: $9,755,000 ========== Loss allowances reserved on impaired loans: $1,280,000 ========== Income recognized on impaired loans during the first six months of 1996 $ 400,000 ==========
The Banks' policy for interest income recognition on impaired loans is to recognize income on restructured loans under the accrual method. The Banks recognize income on nonaccrual loans under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Banks. The Banks will not recognize income if these factors do not exist. OTHER OPERATING INCOME
Six Months Ended June 30, Three Months Ended June 30, ------------ ---------------- -------------- ---------------- 1996 1995 1996 1995 ------------ ---------------- -------------- ---------------- (Dollars in thousands) Service charges $ 1,265 $ 1,130 $ 657 $ 580 Securities gains (losses), net (119) (172) (69) (29) Trust income 685 530 290 288 Other income 585 524 309 260 ------------ ---------------- -------------- ---------------- Total other operating income $ 2,416 $ 2,012 $ 1,187 $ 1,099 ============ ================ ============== ================
Other operating income for the first six months of 1996 increased $404,000, or 20.1%, from $2,012,000 at June 30, 1995 to $2,416,000 at June 30, 1996. This rise in other income is primarily the result of a $155,000 increase in trust income, a $135,000 growth in service charges and a $53,000 reduction in security losses. The second quarter 1996 other operating income of $1,187,000 was $88,000, or 8.0% higher than the second quarter of 1995 other operating income of $1,099,000. This increase was primarily due to a $77,000 increase in service charges and a $49,000 rise in other income, offset by an increase in security losses of $40,000. Both the year-to-date $135,000 increase and the second quarter $77,000 rise in service charges are the result of higher overdraft fees and service fees on checking accounts. The Corporation recorded a $119,000 net security loss during the first six months of 1996, compared to a net loss of $172,000 for the same period in 1995. The 1996 second quarter net security loss of $69,000 was greater than the $29,000 net security loss recorded in the second quarter of 1995. From time to time, the Corporation sells securities to fund the purchase of other securities in an effort to enhance the overall return of the portfolio and to fund loan demand. PAGE 11 Income from the Trust and Financial Services Department increased $155,000, or 29.2%, in the first six months of 1996, compared to the same period in 1995. This was the result of both an increase in the book value of trust assets of 26.3% from June 30, 1995 to June 30, 1996 and the Corporation's continuing emphasis on marketing the Trust and Financial Services Department's products and services. Trust and Financial Services Department income in the second quarter of 1996 was slightly ahead of the second quarter of 1995. Other income for the first six months of 1996 and for the second quarter of 1996 increased $61,000 and $49,000, respectively, compared to the same periods in 1995. These increases were due to higher leasing fees and a rise in credit card fees. OTHER OPERATING EXPENSES
Six Months Ended June 30, Three Months Ended June 30, ----------- ----------------------- ------------- --------------- 1996 1995 1996 1995 ----------- ----------------------- ------------- --------------- (Dollars in thousands) Salaries $ 5,028 $ 4,455 $ 2,499 $ 2,263 Employee benefits 1,725 1,724 837 804 Net occupancy expense 906 757 430 365 Equipment expense 994 864 494 453 FDIC premiums 87 835 43 418 Other expenses 3,657 3,319 1,773 1,753 ----------- ------------- ---------- --------- Total other operating expenses $ 12,397 $ 11,954 $ 6,076 $ 6,056 =========== ============= ========== =========
Other operating expenses for the first six months of 1996 of $12,397,000 increased $443,000, or 3.7%, from the $11,954,000 for the same period in 1995. The rise in operating expenses was largely due to higher expenses related to three new branches opened after June 30, 1995 and one that opened during May 1995. Also contributing to this rise were increases in legal fees, consulting fees and expenses related to the overall growth of the Banks. These increases were partially offset by a reduction in the Federal Deposit Insurance Corporation ("FDIC") premium. The second quarter of 1996 other operating expenses of $6,076,000 increased $20,000, over the second quarter of 1995 other operating expense of $6,056,000. Employee salaries increased $573,000, or 12.9% from $4,455,000 for the first six months of 1995 to $5,028,000 for the same period in 1996. The salary increase directly related to the staffing of the four new branches was $230,000. The remaining increase in salaries reflects cost of living increases, merit increases and additional staff necessitated by current and planned future growth. Employee benefits of $1,725,000 expensed in the first six months of 1996 increased slightly, from the $1,724,000 employee benefits expensed during the same period in 1995. This small growth is the result of the tax expense associated with stock options exercised during the first quarter of 1995, being equal to the increase in employee benefits associated with the new branches and normal salary increases during 1996. The $33,000 growth in employee benefits expense in the second quarter of 1996, compared to 1995 is primarily due to the new branches. Net occupancy expense increased $149,000, or 19.7%, from $757,000 in the first six months of 1995 to $906,000 in the first six months of 1996. The four new branches were responsible for $94,000 of this increase. The $65,000 increase in occupancy expenses in the second quarter of 1996, compared to the same period in 1995, is primarily due to the $38,000 associated with the new branches. Equipment expense increased $130,000, or 15.0% during the first six months of 1996, compared to the same period in 1995. The first six months of 1996 equipment expenses related to the new branches totaled $61,000. The remainder of this rise is due to both equipment depreciation and maintenance associated with planned increased data processing capabilities. The increased data processing capabilities include modernizing our branches through platform automation and teller terminals, and the ongoing updating of data processing equipment to manage the rise in volume related to the growth of the Corporation. Equipment expenses grew $41,000 in the second quarter of 1996, compared to the same quarter in 1995. PAGE 12 During the third quarter of 1995, the FDIC confirmed that the Bank Insurance Fund was fully recapitalized at the end of May 1995. As a result, the new lower premium rates were made retroactive to June 1, 1995. The first half of 1996 FDIC premium expense was $87,000, compared to the first half of 1995 premium expense of $835,000. The second quarter of 1996 FDIC premium was $43,000 and the second quarter of 1995 FDIC premium was $418,000. Congress is also considering a variety of proposals to remedy the large disparity of insurance premiums paid by savings and loan associations for deposit insurance under the Savings Association Insurance Fund ("SAIF") administered by the Federal Deposit Insurance Corporation ("FDIC") in comparison to the premiums paid by banks for deposit insurance under the Bank Insurance Fund ("BIF") also administered by the FDIC. Management is unable to assess the exact cost associated with any of these proposals, but one or more of these proposals should result in an increase of FDIC premiums in the future and/or the payment of some type of special assessment. Other expenses increased $338,000, or 10.2%, from $3,319,000 in the first six months of 1995, compared to $3,657,000 other expenses recorded during the same period in 1996. This increase is primarily the result of a $149,000 increase in legal expenses, a $92,000 rise in consulting fees and $32,000 in expenses related to the new branches. The increase in legal fees are associated with the Farmers merger, the resolution of legal matters and legal fees related to maintaining the loan portfolio. The rise in consulting fees are related to franchise expansion and consultation concerning enhancements to bank operations. The second quarter 1996 other expenses of $1,773,000, were $20,000 higher than the other expenses recorded in the second quarter of 1995. INCOME TAXES Income tax expense is less than the amount calculated using the statutory tax rate primarily as a result of tax exempt income earned from state and municipal securities and loans. BALANCE SHEET ANALYSIS Total assets grew $42,530,000, or 4.5%, from $937,345,000 at December 31, 1995 to $979,875,000 at June 30, 1996. This growth was primarily in interest earning assets which grew $36,962,000 to $926,693,000 at June 30, 1996, from $889,731,000 at December 31, 1995. During the first six months of 1996 loans grew $26,099,000, investment securities grew $16,322,000, interest-bearing deposits in banks rose $2,836,000 and Federal Funds Sold decreased $8,295,000. Total deposits rose $38,940,000 from $794,500,000 at December 31, 1995 to $833,440,000 at June 30, 1996. This growth was due to a $11,912,000 rise in time deposits, a $11,696,000 growth in noninterest-bearing accounts, an $11,349,000 increase in money market accounts and a $4,870,000 increase in savings accounts. Offsetting these increases was a $887,000 decrease in NOW accounts. Other borrowing decreased $1,929,000 during the first six months of 1996. CAPITAL Capital formation is critical to the Corporation's well being and future growth. Capital for the period ending June 30, 1996 was $90,165,000, an increase of $3,803,000 over the end of 1995. The increase is primarily the result of the retention of the Corporation's earnings. Management believes that the Corporation's current capital and liquidity positions are adequate to support its operations. Management is not aware of any recommendations by any regulatory authority which, if it were to be implemented, would have a material effect on the Corporation's capital. The Corporation's capital ratios exceed regulatory requirements. Existing minimum regulatory capital ratio requirements are 5.5% for primary capital and 6.0% for total capital. The Corporation's primary capital ratio was 10.00% at June 30, 1996, compared with 9.98% at December 31, 1995. Since the Corporation's only capital is primary capital, the total capital ratios are the same as the primary capital ratios. PAGE 13 Pursuant to the federal regulators' risk-based capital adequacy guidelines, the components of capital are called Tier 1 and Tier 2 capital. For the Corporation, Tier 1 Capital is the shareholders' equity, and Tier 2 capital is the allowance for loan losses. The risk-based capital ratios are computed by dividing the components of capital by risk-adjusted assets. Risk-adjusted assets are determined by assigning credit risk-weighting factors from 0% to 100% to various categories of assets and off-balance sheet financial instruments. The minimum for the Tier 1 ratio is 4.0%, and the total capital ratio (Tier 1 plus Tier 2 capital divided by risk-adjusted assets) minimum is 8.0%. At June 30, 1996, the Corporation's Tier 1 risk-adjusted capital ratio was 12.67%, and the total risk-adjusted capital ratio was 13.92%, both well above the regulatory requirements. The risk-based capital ratios of each of the Corporation's commercial banks also exceeded regulatory requirements at June 30, 1996. To supplement the risk-based capital adequacy guidelines, the Federal Reserve Board established a leverage ratio guideline. The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding intangible assets. The minimum leverage ratio guideline is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings and, in general, are considered top-rated, strong banking organizations. Other banking organizations are expected to have ratios of at least 4% and 5%, depending upon their particular condition and growth plans. Higher leverage ratios could be required by the particular circumstances or risk profile of a given banking organization. The Corporation's leverage ratios were 9.22% at June 30, 1996 and 8.99% at December 31, 1995. The year-to-date June 30, 1996 cash dividend per share of $.38 was 11.8% higher than the cash dividend for the same period in 1995 of $.34. The $.19 per share cash dividend paid during the second quarter of 1996 was 11.8% higher than the $.17 per share cash dividend paid during the second quarter of 1995. On June 28, 1996, the Corporation paid a 5% stock dividend (five shares of common stock for each 100 shares of common stock outstanding held), to shareholders of record June 14, 1996. Activity in both the Corporation's dividend reinvestment and stock purchase and stock options plans did not have a material impact on capital during the first six months of 1996. LIQUIDITY Liquidity is a measure of the ability of the Banks to meet their needs and obligations on a timely basis. For a bank, liquidity answers the ability to meet the day-to-day demands of deposit customers, along with the ability to fulfill the needs of borrowing customers. Generally, the Banks arrange their mix of cash, money market investments, investment securities and loans in order to match the volatility, seasonality, interest sensitivity and growth trends of its deposit funds. Federal Funds sold averaged $14,811,000 during the first six months of 1996 and securities available for sale averaged $182,678,000 during the first six months of 1996, more than sufficient to match normal fluctuations in loan demand or deposit fund supplies. Backup sources of liquidity are provided by Federal Fund lines carried in the subsidiary Banks. Additional liquidity could be generated through borrowings from the Federal Reserve Bank of Philadelphia and the Federal Home Loan Bank of Pittsburgh, of which Harleysville, Citizens and Security are members. There are currently a number of issues before Congress which may affect the Corporation and its business operations, and the business operations of its subsidiaries. However, management does not believe these issues will have a material adverse effect on liquidity, capital resources or the results of operations. There are no known trends or demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way. Aside from those matters described above, management does not currently believe that there are any known trends or uncertainties which would have a material impact on future operating results, liquidity or capital resources nor is it aware of any current recommendations by the regulatory authorities which if they were to be implemented would have such an effect, although the general cost of compliance with numerous and multiple federal and state laws and regulation does have and in the future may have a negative impact on the corporation's results of operations. PAGE 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings. - ----------------------------- Management, based upon discussions with the Corporation's legal counsel, is not aware of any litigation that would have a material adverse effect on the consolidated financial position of the Corporation. There are no proceedings pending other than the ordinary routine litigation incident to the business of the Corporation and its subsidiaries - Harleysville National Bank and Trust Company, The Citizens National Bank of Lansford and Security National Bank. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation and the Banks by government authorities. Item 2. Change in Securities. - ------------------------------ Not applicable. Item 3. Defaults Upon Senior Securities. - ----------------------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. - ------------------------------------------------------------- (a) An annual meeting of shareholders was held at 9:30 a.m., on Tuesday, April 9, 1996, at Presidential caterers, 2910 DeKalb Pike, Norristown, Pennsylvania 19401. (b), (c) One matter was voted upon as follows: (1) Two directors were elected, as below: Elected Term Expires ------- ------------ John W. Clemens 2000 Palmer E. Retzlaff 2000 The results of the voting for the directors are as follows: John W. Clemens For 5,181,945 Against 24,445 Abstain 1,726 Palmer E. Retzlaff For 5,143,639 Against 62,751 Abstain 1,726 Directors whose term continued after the meeting: Term Expires: ------------ Walter F. Vilsmeier 1999 Harold A. Herr 1999 Walter E. Daller, Jr. 1998 Martin E. Fossler 1998 Bradford W. Mitchell 1997 William M. Yocum 1997 PAGE 15 Item 5. Other Information. - --------------------------- None. Item 6. Exhibits and Reports on Form 8-K. - ------------------------------------------ (a) Exhibits: None. (b) Reports on Form 8-K: On March 1, 1996, a Form 8-K was filed by the Registrant reporting that on March 1, 1996, Farmers & Merchants Bank ("Farmers") was merged with and into The Citizens National Bank of Lansford ("Citizens"), a wholly owned subsidiary of Harleysville National Corporation (the "Corpora- tion"), pursuant to an Agreement and Plan of Reorganization dated September 7, 1995, and a related Agreement and Plan of Merger of the same date. Share- holders of Farmers received 0.6190 shares of the Corporation's Common Stock for each share of Farmers' Common Stock outstanding prior to the acquisition. A total of 438,262 shares were issued by the Corporation in the transaction. The acquisition is not expected to have a material impact on the Corporation's financial position and results of operations. PAGE 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HARLEYSVILLE NATIONAL CORPORATION /s/ Walter E. Daller, Jr. _________________________________ Walter E. Daller, Jr., President and Chief Executive Officer (Principal executive officer) /s/ Vernon L. Hunsberger _________________________________ Vernon L. Hunsberger, Treasurer (Principal financial and accounting officer) Date: August 13, 1996 PAGE 17 EX-27 2
9 1000 6-MOS DEC-31-1996 JUN-30-1996 38643 4540 8000 0 199228 60089 60407 654837 10494 979875 833440 28822 18449 9000 0 0 6637 83528 979875 27767 7723 471 35961 14135 993 15128 1055 (119) 12398 9796 9796 0 0 7029 1.05 1.05 4.85 9612 1988 1115 0 9891 513 61 10494 10494 0 4763
-----END PRIVACY-ENHANCED MESSAGE-----